In the Military Construction Authorization Act for Fiscal Year 1984 (Public Law 98-115), Congress enacted, and President Ronald Reagan signed into law, legislation that established two new pilot programs for military family housing. Dubbed the “801” and “802” programs after the sections of the act that established them, the programs
attempted to tap the resources of the private sector to improve military family housing. Armed with a series of inducements and guarantees, the Defense Department hoped to persuade private developers to build family housing on or near military installations and make that housing available to service members. Better family housing, the Defense Department argued, would improve morale and encourage reenlistment. While these factors are critical to any armed force, they were especially important for a rapidly expanding, all-volunteer force, which was just a decade old. As the Reagan
administration launched its post-Vietnam buildup of American forces, family housing, like manpower and hardware, would benefit from increased military spending. (Baldwin, 1996)
The Section 801 and 802 programs were touted as the complete solution to DoD’s long-standing housing problem. During congressional testimony in 1983, Lawrence Korb, Assistant Secretary of Defense for Manpower, Reserve Affairs and Logistics said the new 801/802 programs would
maximize private initiative, benefit the community, minimize government involvement, increase freedom of choice for all people in choosing housing, and greatly reduce the Government’s short and long-term costs.
Section 801/802 MFH was rented primarily to military service members.
Although service members were not officially required to accept 801/802 units, they were strongly advertised and supported by the installation housing offices. For service
members, 801/802 units were easy to obtain and less costly than other private sector housing when traditional on-post housing was not available. Eligible military personnel voluntarily rented the units, using their housing allowances, and paid their own utilities out of pocket. Rental rates were determined jointly between DoD and the developers, and were described as “reasonably equivalent to comparable rental units in the
community.” The private developer operated, maintained and managed the housing units. The developer risked losing his lease/rental guarantee if maintenance and management support was inadequate. The Defense Department had the right of first refusal to acquire the units at the end of the leases. (Baldwin, 1996)
Both 801 and 802 were initially designated as two-year pilot programs. Congress renewed them annually before modifying them and making them permanent housing options in 1991. Reluctant to relinquish any budget control to DoD, 801/802 deals required Congressional approval after the service components negotiated/structured the deals with private developers. The Congressional Budget and Impoundment Control Act of 1974 required specific language in the contract agreements stating that “the obligation of the United States to make payments under the agreement in any fiscal year is subject to the availability of appropriations for that purpose,” and is commonly referred to as the ‘subject-to-availability-of-funds’ clause. This provision made private developers
skeptical of the Government’s long-term intentions, significantly hampering efforts to encourage private investment in 801/802 projects, and leading to a slow start for the programs.
a. Section 801, Before 1991: “Build-to-Lease”
Section 801 was significantly more successful than its 802 cousin. It was called ‘build-to-lease’ because developers built the housing units after winning
competitive bid processes, entered into lease agreements with service components and obtained Congressional approval. The projects required new unit construction, built either on-post or off-post, in accordance with local building codes, rather than DoD construction standards. Off-post units were to be located within 30 miles and a 60-minute commute from the installation, and were subject to local property taxes. The leases were 20 years in length, allowing either contractor or Government operations and maintenance.
The service component paid rent, in the form of lease payments, in return for filling all units with military personnel. The rent was funded from a pool of money derived from forfeited housing allowances. Service members forfeited receipt of their housing allowance and paid their own utilities out-of-pocket. Rental prices were based on the Government’s leasing contract with the developer and not connected to housing allowance rates.
b. Section 801, Problems and Revisions
Section 801 projects immediately encountered a host of difficulties but managed to produce housing units throughout the 1980s. Projects were significantly delayed as developers negotiated lower, more favorable tax rates with local governments, and tried to avoid Davis-Bacon wage rates. The Department of Labor eventually ruled in favor of the labor unions, upholding Davis-Bacon wages, thereby prompting developers to ask for additional funding since the higher Davis-Bacon wage rates were not priced into bids. The services argued that the lower property taxes and the associated delays while contractors negotiated them were adequate offsetting values for the higher wages. Another source of controversy regarded the Government’s responsibility to ensure the projects’ adherence to construction codes. DoD claimed it had only to ‘monitor’ the projects, since they were built to commercial standards, not DoD codes; and that local governments and investors shouldered the duty to ‘inspect.’ The General Accounting
Office (GAO) agreed that DoD need only monitor the projects, but must more specifically define exactly what monitoring entailed. (GAO/NSIAD -87-13BR)
To obtain lower land costs, and consequently lower bid prices, some contractors sought land at the outer reaches of the 30 mile/60-minute range arc. At Fort Drum, New York, 801 residents complained of isolation from the Post and its associated facilities benefits, coupled with frequent and excessive commuting hazards, especially during winter weather. By 1986, section 801 still appeared favorably enough to DoD that the Department’s policy was to obtain all future MFH through a 60/40 mix of MILCON and 801 programs. Congress was skeptical as to how 801 leasing could be less costly, in the long run, when compared to MILCON “ownership.” They required that all 801 projects show at least a 5% cost savings when compared to MILCON before approving the lease arrangements. GAO was also skeptical, firmly believing that leasing was more expensive in the long run due to contractor profits, poor construction quality, and poor maintenance prospects. While not mandatory, GAO recommended the services include performance bonds in their contracts, to increase the probability of successful project completion with minimal financially related delays (GAO/NSIAD -87-13BR). The services, primarily the Army, had not used performance bonds, believing that a guaranteed long-term lease arrangement negated their usefulness, and only increased overall project cost. Congress modified the 801 programs in 1991, ending its pilot stage and making it a permanent MFH option. The changes included allowing for rehabilitated units to increase program flexibility and reduce costs, especially in urban areas.
Addressing GAO concerns, off -post construction was mandated. GAO argued that on-post projects were not operating leases, but were actually disguised capital leases, with significant legal and funding implications since the Government was
effectively obligated to purchase the property at the end of the lease (GAO/NSIAD -87- 13BR). Finally, DoD agreed to assume operations and maintenance functions, easing congressional fears of developers skimming maintenance dollars to boost profits and leaving service members to reside in substandard/unsafe conditions. GAO contended that, similar to Wherry projects, developers would lose interest in maintenance after the first seven or eight years of the lease, when maintenance costs increased and profit- boosting depreciation was exhausted.
c. Section 802, Before 1987: “Rental Guarantee”
This program was called ‘rental guarantee’ because the service component guaranteed that military personnel would occupy a minimum percentage (up to 97%) of the units, with the service filling the rental gap if occupancy was too low. To minimize the chances of a vacancy gap, 802 projects were restricted to bases where current military-controlled housing had exceeded a 97% occupancy rate for the preceding 18 consecutive months. This requirement could be waived for new installations or those expecting a large increase in military personnel during the 1980s expansion. Section 802 projects required new unit construction, built either on-post or off-post, in accordance with DoD construction standards, and subject to local property taxes. The rental
guarantees lasted for a 15-year maximum, were not renewable, and specified contractor operations and maintenance. DoD was responsible for 80% of the property tax increases over the contract life.
Service members received their housing allowance, and forwarded it to the contractor as rental payment, paying for their own utilities out-of-pocket. To protect against escalating rental rates, only that portion of the rent devoted to operation and maintenance (maintenance rent) was allowed to rise over the contract period. Shelter rent was fixed over the contract life.
d. Section 802, Problems and Revisions
From the beginning, section 802 projects were unpopular with private developers. Since shelter rent was fixed over the contract life, and initial construction costs were capped at about 85% of the average occupants housing allowance, contractors envisioned inadequate profitability opportunities. By 1987, section 802 had produced no housing, and was “dying on the vine.” Congress revived the program by relaxing its parameters. Using local building codes and including rehabilitated units reduced construction costs and attracted private investor interest. Unfreezing shelter rent, permitting government O&M, and extending contract life spans to 25 years increased developers’ long-term profitability prospects. Lastly, for those projects built on Government land, lease renewal became an option, but was limited to the length of the original contract. By 1993, section 802 had produced only 276 units, and although authorized, its use was not pursued.